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Fraud. The Hidden Skill of a Trusted Employee

The Association of Certified Fraud Examiners (“ACFE”) recently released their 8thReport to the Nation on Occupational Fraud and Abusewhere they summarized forensic cases from 2013 based on data provided to them by certified fraud examiners, internal auditors, and accounting professionals.

Over the past several years, many of the statistics compiled have not varied much from report to report. Simply put, fraud isn’t going away.

The crime can affect every company. Employees continue to steal. Many frauds are never uncovered. The longer a fraud occurs, the more a company loses. Companies cannot rely on external annual financial statement audits in order to identify fraud. Those are some of the consistent themes in the 2014 Report.

Aside from the actual financial loss itself, fraud is costly to a business. It is estimated that organizations lose 5% of revenues each year due to employee fraud resulting in median losses of $145,000. Unfortunately, the actual theft is only the beginning. Once a fraud is discovered the company will lose a substantial amount of internal productivity as a result of people now involved in attempting to quantify the loss. But, there’s more. What about the public relations nightmare and potential damage to the company’s reputation if the crime is made public? Finally, forensic investigations and criminally or civilly addressing the matter are additional hidden costs.

The four most exploited areas that employer’s should scrutinize remain:

Checks

Billing

Inventory (non-cash assets)

Expense reports

Check tampering, payroll, expense reimbursements, and billing frauds take on average two years to be discovered – that’s six months longer than the average of all frauds.

Employers must properly evaluate new hires. I have always been an advocate of background and credit checks, not only at the time of hiring but throughout one’s employment. While four out of five fraudsters are first-time offenders, less than 7% of new employees still committed a fraud in the first year of employment. And of these, many had prior fraud-related convictions.

The higher the position in the company, the more the individual usually steals as a result of their knowledge of, and at times ability to, override internal controls. Tenured employees also have developed a higher level of managerial trust. Here, financial losses are larger.

Good people still commit bad acts. Financial pressures these days are mounting for many. Most that commit frauds are first time offenders and they have been loyal and long-term employees. While most committing a financial crime prefer to work the crime alone, it is a fact that the more people that participate in a fraud (collusion), the higher the fraud loss.

Organizations employing less than 100 employees experience a greater chance for a larger dollar fraud as a result of less internal controls. A lack of adequate internal controls was identified in 41% of the cases as the primary weakness. Many frauds can be easily prevented.

As a result, many smaller businesses are taking steps to combat the threat of occupational fraud and abuse and mitigate financial losses. Those that institute anti-fraud controls have proven to identify frauds quicker and thus experience less in fraud losses. It is a fact that companies that implement controls to aggressively seek out fraud dramatically reduce the risk of loss.

Make no mistake, early detection saves money. The amount of time from when a fraud begins to the time it is discovered remains at about 18 months.

Employers need to continue to be cognizant of red flags commonly associated with early warning signs of employee misconduct. Most notable of these are employees living beyond their means, known financial pressures, and employees with close associations with vendors and customers.The majority of frauds could be identified sooner if only employers (and specifically managers) would pay more attention to their employees. Listening to employees is critical since tips continue to be, by far, the most common detection method. Fraud hotlines remain a cost effective anti-fraud measure. The threat of being caught is an extremely powerful deterrent.

As has been my own personal first-hand experience, the ACFE Report notes that most employers do not wish to criminally prosecute an employee that commits a fraud as they wish “to cut their losses,” not “air their dirty laundry publicly,” learn from the unfortunate experience and move on.

If you are a fraud victim, the chance of financial recovery is waning. “No recovery” was the most common response.

While fraud hasn’t increased substantially, the statistics bear out that it also hasn’t gone away – or for that matter even been reduced. Companies can do more. Companies should do more. It is never too late to begin to evaluate your internal controls and assess your risk of loss.

If you have a question about fraud, your internal controls or think you may have an employee who is embezzling, please contact me at 440-449-6800. I'm happy to meet with you for a no-cost obligation. As a Partner in Skoda Minotti’s Valuation and Litigation Advisory Support Group, I regularly assist clients with fraud assessments, forensic investigations, economic damage claims, commercial disputes, divorce, and labor relations.